International expansion: opportunities and costs - City Comment
17 July 2014
Over the last decade, most large UK recruiters have invested time and money building an international network. With sterling hitting record levels, the values of international earnings are coming under pressure.
Thu, 17 Jul 2014 | By Adrian Kearsey, head of smaller companies research at Sanlam Securities UKOver the last decade, most large UK recruiters have invested time and money building an international network. With sterling hitting record levels, the values of international earnings are coming under pressure.
The recent trading update from Hays demonstrates the picture quite well. While fees measured in local currency increased 7% year-on-year in the three months to June 2014, they were flat when converted into sterling. A cynic would ask the question, why bother moving abroad if FX [foreign exchange] movements can wipe out any growth?
While some of the larger quoted staffers remain UK-focused businesses (notably Matchtech and Staffline), most of the quoted names are now global players, with offices in all continents. This position has changed dramatically over the last decade. For example, back in 2004 Hays derived three-quarters of its fees from its home market. Today the business has 240 offices in 33 countries and two-thirds of fees are now generated outside of the UK. During that period the company increased international fees from £89m to £497m; this represents a compound growth rate of 21%. By contrast, UK fees over the same period actually contracted 30%.
PageGroup provides a similar picture, with international fees enjoying compound annual growth of 16.2% since 2004. Fortunately for Page its domestic fees have expanded over the period but only by 1.3% (compound annual growth). Therefore, international expansion has clearly been the prime drive of growth for these companies and the position is similar for many of the others, such as SThree.
Admittedly, there are staffers that have delivered meaningful growth in the UK. Matchtech has grown its fee income from £13m to £38m (2004 to 2013) representing annual growth of 12.6%, and Staffline has grown its fee income from £10m to £42m (annual growth of 16.8%). However, the successful domestic staffers of the last decade have typically grown from a much smaller base and have tended to be more specialised in their scope. For many in the sector international expansion has been key.
As a consequence, international expansion has clearly transformed the UK staffing agency landscape. It has re-positioned itself from being an inward- looking domestic industry into a truly global industry, delivering considerable profits for investors.
This expansion is not without risks. Managing overseas businesses can be complicated. Local management teams can put a spanner in the works and local regulation can play havoc with your growth plans.
Then there is the currency risk. Fortunately for staffers this risk is mainly translational in nature. Therefore, any negative FX swing merely impacts the value of earnings and does not create a cash transactional loss (as is often the case with manufacturing). However, this impact can still be material. For example, over the last 12 months sterling has strengthened 12% against the US dollar, 9% against the Euro and 8% against the Australian dollar.
On average this is wiping out one-10th of overseas earnings for the staffers. Essentially they are running to stand still. However, if the pound stabilises (and there are signs that it has), the positive growth being generated in places such as the US and Asia Pacific will help drive sector earnings materially higher as the cycle progresses.
The recent trading update from Hays demonstrates the picture quite well. While fees measured in local currency increased 7% year-on-year in the three months to June 2014, they were flat when converted into sterling. A cynic would ask the question, why bother moving abroad if FX [foreign exchange] movements can wipe out any growth?
While some of the larger quoted staffers remain UK-focused businesses (notably Matchtech and Staffline), most of the quoted names are now global players, with offices in all continents. This position has changed dramatically over the last decade. For example, back in 2004 Hays derived three-quarters of its fees from its home market. Today the business has 240 offices in 33 countries and two-thirds of fees are now generated outside of the UK. During that period the company increased international fees from £89m to £497m; this represents a compound growth rate of 21%. By contrast, UK fees over the same period actually contracted 30%.
PageGroup provides a similar picture, with international fees enjoying compound annual growth of 16.2% since 2004. Fortunately for Page its domestic fees have expanded over the period but only by 1.3% (compound annual growth). Therefore, international expansion has clearly been the prime drive of growth for these companies and the position is similar for many of the others, such as SThree.
Admittedly, there are staffers that have delivered meaningful growth in the UK. Matchtech has grown its fee income from £13m to £38m (2004 to 2013) representing annual growth of 12.6%, and Staffline has grown its fee income from £10m to £42m (annual growth of 16.8%). However, the successful domestic staffers of the last decade have typically grown from a much smaller base and have tended to be more specialised in their scope. For many in the sector international expansion has been key.
As a consequence, international expansion has clearly transformed the UK staffing agency landscape. It has re-positioned itself from being an inward- looking domestic industry into a truly global industry, delivering considerable profits for investors.
This expansion is not without risks. Managing overseas businesses can be complicated. Local management teams can put a spanner in the works and local regulation can play havoc with your growth plans.
Then there is the currency risk. Fortunately for staffers this risk is mainly translational in nature. Therefore, any negative FX swing merely impacts the value of earnings and does not create a cash transactional loss (as is often the case with manufacturing). However, this impact can still be material. For example, over the last 12 months sterling has strengthened 12% against the US dollar, 9% against the Euro and 8% against the Australian dollar.
On average this is wiping out one-10th of overseas earnings for the staffers. Essentially they are running to stand still. However, if the pound stabilises (and there are signs that it has), the positive growth being generated in places such as the US and Asia Pacific will help drive sector earnings materially higher as the cycle progresses.
